By using 15 as our baseline for the interpretation key as
opposed to 12 (which would only account for a year's worth
of rent), we are able to account for the additional costs
such as property tax and homeowners insurance.
Sorry you completely lost me on this line of reasoning, and I actually suspect you've got it quite wrong.Why does 12 account for a year of rent as you say? The ratio is already the price of the house divided by the ANNUAL rent, is it not? Why 15 vs 12 vs 20 vs 30??? Also, additional costs of homeownership like tax and insurance means you should demand a LOWER ratio to truly make the cost of renting and owning equal, not higher as you suggest! My understanding is the ratio is basically a proxy for the P/E ratio (just like P/E ratio in stocks). It is the price of the house divided by the income you would receive renting it. That ratio can float to whatever the market is willing to pay. The graphic on Trulia specifically says though that the ratio is the point where renting == buying. How do you get 15? One metric some people in this discussion are using is the ongoing carry costs of buying vs renting. With borrowing costs at 5% interest rates on 30-year fixed mortgages, along with a 40% marginal tax rate in places like NYC and SF, then the ratio that makes buying and renting about equal is much higher than 15; it has an upper bound at 33, because you can borrow at 3% factoring in tax deduction (1.00 / 0.03), but needs to be adjusted to account for HOA dues, real estate taxes, state income tax, nasty transaction costs, etc. |